Why now is the right time for value-add living strategies

Timing is everything. Execute a strategy at the wrong point of a cycle or within the wrong cycle itself and it’s likely the returns you are looking for will not be generated.

The living sector continues to grow and diversify, offering a greater number of investment opportunities than ever before.

The question we have to ask ourselves at PATRIZIA is what type of opportunities are the right ones right now.

And, as we begin a new and improved, but bumpier, cycle, we see value add as pivotal for the best living opportunities.

Liquidity is currently scarce, opening a window of opportunity for value-add capital for a very attractive entry point.

At the end of the last cycle, value-add strategies incorporated the development risk, but don’t anymore, meaning you can now take a forward funding position and generate the same return on a lower risk-adjusted basis.

We believe that investors who seize the opportunity now have a high chance of being greatly rewarded.

Opportunities

As for what value-add living opportunities we see, we would bucket them into six areas: multi-family housing (MFH) rental, urbanisation, scarcity of supply, regulatory nuances, decarbonisation and European PBSA.

MFH rental is already well established in the likes of Germany, Sweden and the Netherlands. It’s in emerging markets, such as London, where there is a real opportunity to grow this sub-sector. Here, living value-add investors can enter at a higher yield, prove operational performance and exit to core investors in 5-7 years.

Urbanisation is one of the megatrends of our time – and one of the four DUEL megatrends (digital, urban, energy and living transition) guiding PATRIZIA’s long-term investment strategy. While the growing number of people choosing to live in towns and cities is undisputed, knowing where exactly to find the best opportunities requires a wide knowledge base. PATRIZIA’s City Ranking algorithm can identify gentrifying inner-city locations which are ripe for value-add living investment.

There continues to be a scarcity of affordable and mid-market residential supply in Europe. With the supply unlikely to increase in the short term with rising construction costs, as well as tighter lending standards and zoning laws in some European cities limiting development, conversion and demolition, value-add strategies can extract even greater value from the limited housing stock.

Country-specific regulations also offer value-add living opportunities. Less-regulated markets, especially, provide opportunities through development, brown-to-green refurbishments, unit sales and targeting less-regulated segments such as student housing and co-living.

Decarbonisation remains an important facet of the housing market, with brown discounted assets available to transform into green value-creating assets capable of providing value-add returns. In some markets, subsidies are available to aid such decarbonisation efforts.

European purpose-built student accommodation (PBSA) continues to grow as a sub-sector with supply far from meeting demand. The fundamentals for the sub-sector are very strong and offer plenty of value-add investment opportunities.

PATRIZIA and living value-add

To unlock outsized returns, you need a local approach, attention to detail, cutting-edge research and data intelligence combined with a pan-European vantage point. With these ingredients for success, we at PATRIZIA have delivered strong performance to our clients for more than four decades – in living value add, PATRIZIA has achieved 19% gross IRR on all its investments.

Investors who create institutional-grade core product in the next few years through value-add strategies will reap the benefits of providing highly sought-after core propositions in a normalised, much bigger and more liquid market in the future. And this is an exciting time to enter the market and invest in strategies that generate the best risk-adjusted returns for our clients.